Chillin'Competition

11 years ago (!), in the good old times of the notification procedure, Glaxo had notified to the Commission its ‘General sales conditions of pharmaceutical specialities to authorised wholesalers’ with a view to obtaining a negative clearance or an exemption. On 8 May 2001, the Commission (i) found that the notified agreement infringed Article 81(1) EC; and (ii) refused to grant an exemption pursuant to Article 81(3) EC.

Glaxo challenged this decision before the CFI. In an unexpected judgment, the CFI annulled the second part of the Commission’s decision that refused to grant an exemption.

Glaxo, however, lodged a further appeal before the ECJ, seeking to obtain also annulment of the first part of the Commission’s decision that had deemed the agreement unlawful pursuant to Article 81(1) EC.  The Commission lodged a cross-appeal, asking the court to set aside parts of the judgment of the CFI (notably those viewing the refusal to grant an exemption unfounded).

The judgment handed down by the ECJ yesterday in this case exhibits two points of particular importance. First, it delivers an authoritative interpretation of the concept of a “restriction by object” under Article 81(1) EC (I).  Second, it clarifies the burden of proof, in terms of process and substance, under Article 81(3) EC (II).

I. On the concept of a “restriction by object”

Glaxo’s contended that, contrary to the CFI’s view, the agreement was not unlawful pursuant to Article 81(1) EC. In its judgment the CFI had opted for an innovative case-by-case appraisal of the concept of restriction by object. According to the CFI, there was no such thing as a predefinite list of restrictions by object. A restriction can only be deemed a restriction by object upon analysis of its “legal and economic context“. On this basis, the CFI found that the impugned restriction of parallel trade was not restrictive by object (absent obvious proof of consumer harm – parallel traders pocket in the price differential), but was restrictive by effect. Glaxo agreed with the absence of a restriction by object, but contested the existence of a restriction by effect. The Commission, by contrast, challenged the view that there was no restriction by object.

The first important point which the ECJ makes is to reject as erroneous the CFI’s contention that a restriction by object hinges of the identification of consumer harm:

“62 With respect to the Court of First Instance’s statement that, while it is accepted that an agreement intended to limit parallel trade must in principle be considered to have as its object the restriction of competition, that applies in so far as it may be presumed to deprive final consumers of the advantages of effective competition in terms of supply or price, the Court notes that neither the wording of Article 81(1) EC nor the case-law lend support to such a position.

63      First of all, there is nothing in that provision to indicate that only those agreements which deprive consumers of certain advantages may have an anti-competitive object. Secondly, it must be borne in mind that the Court has held that, like other competition rules laid down in the Treaty, Article 81 EC aims to protect not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such. Consequently, for a finding that an agreement has an anti-competitive object, it is not necessary that final consumers be deprived of the advantages of effective competition in terms of supply or price (see, by analogy, T-Mobile Netherlands and Others, cited above, paragraphs 38 and 39).

64      It follows that, by requiring proof that the agreement entails disadvantages for final consumers as a prerequisite for a finding of anti-competitive object and by not finding that that agreement had such an object, the Court of First Instance committed an error of law”.

The ECJ thus quashes the CFI judgment on this point.  In so doing, the ECJ sticks to a textualist reading of Article 81(1) EC: The wording of Article 81(1) EC does not talk of  consumer harm. The appraisal of the restrictive object of an agreement must thus  be established on the basis of”the content of its provisions, the objectives it seeks to attain and the economic and legal context of which it forms a part“,  and only on this basis.

II. On the burden of proof under Article 81(3) EC

Turning, subsequently to the Commission’s contention that the CFI misapplied the case-law in quashing its decision’s refusal to grant an exemption, the ECJ makes a number of interesting points.

First, as to the burden of proof under Article 81(3), the ECJ upholds my analysis the iterative analysis process:

“82 The Court notes, first, that in paragraphs 233 to 236 of the judgment under appeal, the Court of First Instance referred to the case-law, principles and criteria governing the burden of proof and standard of proof required in relation to requests for exemptions under Article 81(3) EC. It correctly stated that a person who relies on that provision must demonstrate, by means of convincing arguments and evidence, that the conditions for obtaining an exemption are satisfied (see, to that effect, Case 42/84 Remia and Others v Commission [1985] ECR 2545, paragraph 45).

83      The burden of proof thus falls on the undertaking requesting the exemption under Article 81(3) EC. However, the facts relied on by that undertaking may be such as to oblige the other party to provide an explanation or justification, failing which it is permissible to conclude that the burden of proof has been discharged”

Second, the Court seems to relax, to a certain extent, the conditions under which parties may be able to prove in substance that they meet the conditions for an exemption (to date, those conditions, as enshrined in the Article 81(3) Guidelines, are almost impossible to meet in practice).  In its cross appeal, the Commission argued that “that the Court of First Instance committed an error of law in finding that it is sufficient that an undertaking wishing to obtain an exemption under Article 81(3) EC show that it is probable that gains in efficiency may occur”.

In this context, the ECJ notes that:

“92 …  in paragraph 247 of the judgment under appeal the Court of First Instance rightly observed that, in order to be capable of being exempted under Article 81(3) EC, an agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress. That contribution is not identified with all the advantages which the undertakings participating in the agreement derive from it as regards their activities, but with appreciable objective advantages of such a kind as to compensate for the resulting disadvantages for competition (see, to that effect, Consten and Grundig v Commission, cited above, p. 348 and 349).

93 As the Advocate General observed in point 193 of her Opinion, an exemption granted for a specified period may require a prospective analysis regarding the occurrence of the advantages associated with the agreement, and it is therefore sufficient for the Commission, on the basis of the arguments and evidence in its possession, to arrive at the conviction that the occurrence of the appreciable objective advantage is sufficiently likely in order to presume that the agreement entails such an advantage.

Furthermore, at §94, the ECJ indicates that the standard of proof hinges on the “balance of probabilities (51/49), rather than on a proof “beyond reasonable doubts” standard:

“The Court of First Instance therefore committed no error of law in paragraph 249 of the judgment under appeal in holding that the Commission’s approach may entail ascertaining whether, in the light of the factual arguments and the evidence provided, it seems more likely either that the agreement in question must make it possible to obtain appreciable advantages or that it will not”.

Finally, the Court clarifies  a number of issues related to Article 81(3) EC but which, in my opinion, are of lesser relevance.

As surmised by Alain Ronzano a few days ago, this case holds the potential to influence the ongoing verticals review, where the Commission proposes an inversion of the traditional burden of proof. Here, the ECJ relaxes the conditions for the applicability of Article 81(3) EC and, indicates that restrictions by object require a careful appraisal. Whilst it does not follow the ambitious CFI proposition that a hardcore restriction implies proof of harm to consumer, it nonetheless indicates that a careful prior assessment must be done (my point a few days ago). As far as parallel trade is concerned, the consequence of this judgment is very simple: the “no consumer harm defence” invoked by drug manufacturers to justify their anti parallel trade strategies does not disqualify a finding of restriction by object (this argument hinges on the view that fact that parallel traders pocket-in the margins, and that by virtue of price regulations, parallel trade does not lead to lower prices, and thus has no beneficial effect on consumers).

In brief, a tougher Article 81(1) EC and a laxer 81(3) EC .

(Image possibly subject to copyrights. Source here)